Can’t Borrow Off the House? Plastic Returns as the Bank

For awhile, Americans seemed to be getting ahead of their debt by taking out a HELOC and paying off the credit cards, some of which carry interest rates as high as 26%. It seemed like a smart strategy because HELOCs had interest rates much lower.

Problem is, many Americans went right on spending, running up balances on credit cards once again. Only now, they can no longer borrow off the house to pay it off. Will Americans reduce spending in order to keep their credit card balances down?

Not likely. From the Baltimore Sun:

As growth in home equity balances has fallen almost to zero, credit-card balances have increased at a 17 percent annual rate over the past six months, according to a report by Merrill Lynch economist David Rosenberg. And the trend, he writes, “is clearly accelerating.” A year ago card balances were shrinking.

The data is not encouraging. Americans have kept on spending even as the credit machine for home loans and refinancings has shut down. From Reuters:

Federal Reserve data released on Friday showed U.S. consumer borrowing rising by $12.18 billion in August, more than 20 percent more than economists had forecast.

Most striking was an 8.1 percent increase in borrowing on revolving credit lines, mostly credit cards, to a record $909 billion.

Credit card borrowings rose at the sharpest rate since early 2002.

We’re at records on credit cards now. What is the incentive to stop spending if the banks will keep lending? And so far, they are (on credit cards, that is.) Everyone knows how easy it is to get new credit cards, even for people who have recently declared bankruptcy.

We are a monthly payment nation- addicted to easy credit and thinking only about how much the item will cost us per month. Want the vacation? Charge it and pay it off over the next five years. There is nothing that is denied us anymore. No one says “no.”

We are supposed to be better off than our parents generation. Nearly every American has a television. Most have refrigerators and stoves. Most have phones. This is progress.

So far, Americans seem to be handling the debt load. From Reuters:

Delinquencies are still low, though the most recent data covers only the second quarter. Late payments on bank cards fell in the second quarter to 4.39 percent from 4.41 percent, according to the American Bankers Association.

Eventually, the growing debt load will bite. How did we get in this deep?